On Syria, the Syrian economy and a few other issues

Month: September 2012

During a one-day event dedicated to the situation in Syria 18 months after the beginning of the uprising, I spoke at the London School of Economics on the economic and social background of the Syrian revolution.

The following is an excerpt from my presentation during a conference organized by the London School of Economics in September 2012. Its title is: “The State of the Economy: How Long can Syria Survive?” For the video of the presentation go here.

First of all, I would like give some background on the economic and social conditions prevailing in Syria before the beginning of the revolution and, through that, try to answer another question which is: did the economic and social condition in Syria in 2011 play a role in the beginning of the revolution? Let me go back very quickly to history. Syria was the founding member of the General Agreement on Tariffs and Trade (GATT) in 1946 out of only 23 countries across the world. Meaning, less countries than the EU has now. To this day, a lot of Syrians have this pride of being a country which for very long a wealthy country. In the early 1950s, while most countries were still fighting for the independence, Syria had a vibrant economic and cultural life. In the 1960s and 1970s, you had socialist policies driven by the Ba’ath Party which involved heavy investment in physical infrastructure and in the health and education services. At the end of the 1970s, Syria had very strong and good economic and social indicators. In 1983, that is less than 30 years ago, Syria had per capita GDP which was higher than that of Turkey, which was at a par with that of South Korea, so that gives you an idea. I mean, obviously, now South Korea is assembling cars, building ships and producing tablets and we are still producing biscuits and t-shirts, but still three decades ago, you know — I think this is very important to understand the mind set and the frustration that you can have in various parts of Syrian society.

Let me give an example for instance, a personal one, my family in-law. Two civil servants in the late 1970s, early 1980s living from their wages. With their wages they buy a flat in the central district of Damascus – Koussour for those of you of who know it. They can go every summer on vacation. Their children are schooled at Syrian public schools and Syrian public universities and these children that were schooled there, now one of them is an IT engineer in Phoenix, another is a bank manager in Montreal. Then, in the early 1980s, an economic crisis begins — and I’m not going to go too much in to details — and in 1986 you have the beginning of the devaluation of the Syrian currency. It begins in 1986 and it goes on for several years. At the time, a dollar was worth £4 within a few years it fell close to £50. In 1986, that’s an important date because it is really the beginning of the implosion of the Syrian middle class. It is the beginning of the end and, to this day, the crisis of that period is being felt amongst Syrian society.

From then on, significant divestment from the state, beginning of liberalisation from the mid to late 1980s, but the discovery of crude oil reserves delays economic reforms. Because with new crude oil reserves the government has new fiscal margins of manoeuvre, it has new forex revenues and it doesn’t feel the need to reform. And the need to reform coincides more or less with the arrival of Bashar in 2001 because oil reserves are down and then you have the whole set of economic reforms with the aim of liberalising the economy. You have some improvement in the legal and regulatory framework, you have the reduction in customs barriers, you have more and more sectors that are open to private investment. But during this small period, the Syrian population continues to increase and it increases more than 3 percent per year. GDP continues to be very low 1, 2, 3, 4, 5 percent. I know you may think 5 percent is great, it’s an excellent growth rate. Now you need to know that in Syria you need to have an annual GDP growth of 8 percent to find enough jobs for the new labour market entrants. In other words, if you have less than 8 percent, a GDP growth of less than 8 percent you have an increase in unemployment. In the last 30 years Syria has never grown by 8 percent. Meaning, in every single year unemployment has increased in Syria. In practice, it didn’t really happen exactly this way because that’s only a gross indicator and then you have migration and then you have lower incomes.

But the idea is that from the beginning to the 1980s until now you have a strong, you have a gradual divestment of the state, a gradual reduction in the income of average population and the implosion of the middle class. So the liberalisation efforts initially or theoretically their aim is to find an answer to these problems and they succeed to a certain extent. They manage to bring in investors, to attract private investment so now you can go to a Costa Café in Damascus, you can open a bank account and get an ATM card and get a loan at an interest rate of 11 percent maybe, but still you can get the loan.

But these reforms, in doing these reforms, if the government makes two mistakes, at least two things it doesn’t do. First of all, it doesn’t carry political reforms meaning the legal and regulatory framework is a bit improved but not enough to attract investors. The judiciary system is extremely corrupt for instance. And in 2010, the year before the beginning of the revolution, Syria’s foreign direct investment was still, after 10 years of reform, lower than that of Jordan for instance, which is a country that has a fifth of the population of Syria and none of its vast resources. And very regularly Syria ranks at the bottom of all major surveys in terms of, for instance, the Corruption Perceptions Index by Transparency International, the Doing Business report, the Competitiveness Report by the World Economic Forum. So the lack of political reform, the lack of reform of judicial system, among other, is a major impediment to attract more investment.

Another mistake is done, which is more classical, which we see more often in emerging countries, which is that this liberalisation of the economy has not been accompanied by significant support from the state to help the economy adapt to these changes. Let me give you an example: agriculture sector for instance, someone mentioned earlier today this issue. In 2008, Syria was in the third year of heavy drought, very, very difficult drought. But in the spring of 2008, the government decided to multiply by three the price of gas oil which is used by farmers to fuel their irrigation pumps and to raise the price of fertilisers to world market levels, so significant increases in prices. So these reductions in subsidies are needed because the government cannot keep subsidising, but they are done at a very bad time. The timing is very bad and there are no real significant accompanying measures. At the same time, the free trade with Turkey and with the greater Arab area — you have an invasion of foreign products in Syria. Theoretically, free trade agreements are also supposed to help Syrians export more, but because of the lack of sophistication of Syrian manufacturers, the lack of support, the lack of, for instance, bank loans or export insurance, Syrian exporters export very little. And the local market is, as I said invaded, what this leads to is to closure of dozens of factories, of workshops and so on.

So we arrive in March 2011. As I was saying, the growth in GDP — 4 to 5 percent in preceding years and the reforms – had helped generate rapid boom in Syria’s urban centres, the banking, insurance sectors were booming, the service sector was booming. We at The Syria Report for instance, we sell subscriptions to corporate institutions. In 2010, our subscription revenue increased 30 percent compared to 2009 because our clients are the clients that are in the cities, they are in real estate. But at the same time, you have in the slums of these cities because of the agriculture, the crisis of the agriculture sector had a very damaging effect. Among other things it led to the migration of hundreds of thousands of people from the east to the suburbs of Damascus, Daraa and Homs.

Let me go back to my family in-law in 2011, 30 years later. Out of their five children, four have migrated. They look now like a very typical Lebanese family. In the early 1980s, Syrians did not migrate for job purposes. You had people who left for political reasons or the bourgeoisie that had left earlier but people would not leave in the 1980s. Now you have massive migration. People who are of my generation who were schooled in public schools, today in Syria – today in public school if they have the means to pay for private school. If you have the means to pay private, you go to private. You never go to state universities. And people who would have the same, you know, civil servant status today would not obviously be able to buy any flat neither in Damascus or in the suburbs and they would very often be working in the evening, either managing grocery or, if it’s a man, driving the taxi. So that’s where we are in 2001. Certainly not a catastrophic situation. Certainly not hunger. Rising poverty. Rising frustration. A very corrupt and bureaucratic state and, in the cities, in the urban centres, [inaudible] Damascus and in Aleppo, for instance.

So then you have the beginning of the revolution and the impact it has had on the economy. You have three main factors. Dr Fawaz just mentioned sanctions, but very often we forget that sanctions began to be applied in May, but in practice the most significant piece of sanctions was the ban on crude oil exports which was implemented really only in November. So the first impact of the revolution is a very severe and quick decline in confidence by both consumers and investors. In the first half of 2011, for instance, the number of investments licensed by the Syrian Investment Agency was down 43 percent compared to the same period in 2010 while in previous years they have been regularly increasing. Now, that’s the first half of 2011 meaning the revolution had begun only three months earlier. People spent much less. Of course, people keep their savings because nobody really knows where the country is heading to. That’s one piece. So the beginning of the protests lead to a lack in confidence and to a decrease of investment and spending.

The second impact on the economy is poor economic policies. Very, very quickly, a week after the beginning of the protest in the Daraa, the government announces a 20 to 30 percent increase in civil servant salaries. I mean, in France, they are debating to increase 2.5 percent, 2.75 percent. There it was 20 to 30 percent. A few weeks later, the price of heating oil or mazut (a gas and heating oil) which represents a significant subsidies items in price and which was supposed to be increased gradually is decreased 25 percent. Then, over the sanctions the government suspends free trade agreements with Turkey, but signs preferential trade agreement with Iran. So you have a very confusing picture of government economic policies and that also is a factor in lower investment in the country because the only obvious conclusion you can draw from these economic measures is that they are taken entirely on the basis of political priorities and not on the basis of economic pressure.

And then the third aspect is that of international sanctions. Sanctions are applied on individuals so you have asset freezes and a travel ban on a long list of individuals and state entities. You have sanctions on crude oil exports and you have sanctions on the banking system. So the impact of these sanctions is significant. It is not in my opinion today the most overwhelming factor in terms of the economic crisis the country is facing. It will have an impact in the future, for instance, the ban on crude oil exports has, although we don’t have any official figures, but has most probably reduced very significantly the foreign reserves of the government because the government has been forced to use its foreign currency reserves to pay for imports and for other things. Now, that’s in a way, mortgaging Syria’s future because by reducing the foreign reserves that took really a decade to accumulate, you are basically putting the future Syrian government, whatever it is, without basically any reserves. As one a diplomat told me in Beirut, “you know, it’s good if you don’t have reserves. You would be obliged to take that and when people take that they are forced to work”. So it was a bit cynical obviously. It doesn’t reflect official policy but it does a little bit the mind set of where many people were.

The sanctions on the banking sector have disrupted significantly banking transactions. They have had bad effects also I know personally from a personal account recently there were the last bank to be under sanctions by the international institutions is – the Syria International Islamic Bank which is a private sector bank and which is allegedly used as a mirror by the Commercial Bank of Syria to do transaction. The Commercial Bank of Syria is a state bank so they use SIIB. The EU and the US discover that, that is how it is proceeding today so they put sanctions on SIIB. But I know from people from the SNC who told me that SIIB’s letter of credits and imports which are used to import wheat, to import medicines and some of them, at least, were against applying sanctions. So they have an ambiguous impact. We can talk about this a bit later if you want.

Let’s run the figures in terms of numbers where we are today. Syria’s gross domestic product probably contracted last year anywhere between 12 and 15 percent and this year it will contract anywhere between 20, 25, 30, 35 percent and we don’t really know. We have absolutely no idea what’s going on in Aleppo, Idlib and Deir ez-Zor, but a very significant contraction. Unemployment is very high. In large parts of the country anyway unemployment is not an issue really because people are just fleeing violence. Foreign exchange reserves like I told you are down. The currency has lost 50 percent of its value in the last 18 months. It was traded at 47 SYP a dollar in March 2011. It is now at 70 SYP. It was at 70 SYP on Friday and 72 SYP on Monday and today at 74 SYP if I understand. Inflation is officially, in June, at 36 percent before the price was at 4 percent so it’s also a significant increase. Government expenses have been – I mean government has larger divested from the economy in terms of investment expenditures. It’s really paying only salaries.

Now, I’m giving you all this data and all these figures, but you have to realise that, in practice, you can’t really talk anymore about the formal economy. For instance, I’m taking about the inflation rate. Officially, that’s one of the very few indicators that are published officially publicly. It is at 36 percent, but you have to look at, first of all, these figures and then very different situations across the country. For instance, before coming to London, I met someone who has just comeback from a village near the city of Raqqah in the north east. So I was asking him about the economic and social condition there. It’s a village near Raqqah. He was telling me there is no gasoline whatsoever. Telephone is cut off, both the landline network and the mobile phone networks are cut off, no connections. A kilogram of tomatoes which was sold at 25 SYP a few weeks earlier is now sold at 125 SYP and the cooking gas cylinder is sold at a $100. It was very interesting because, for the first time, someone prices anything in dollars. In Syria, you price everything in pounds and, of course, it reminds you a bit of Lebanon where the currency devalued so quickly that people were obliged to fix the price in dollar. But still $100, that’s 10 times its price in Damascus. A cooking gas cylinder in Damascus is sold at 700 SYP in the market at $10.

So besides this, you have a very severe disruption of trade, of distribution, of the transport and logistics routes. Areas are controlled by the FSA. Others are not. So the transport of goods is made very difficult. In many areas, farmers cannot pick their crops. In Idlib, the olive crop for instance was very good. If you look at the figures, they were very good but how many of them can really pick their crop. In Aleppo — Aleppo is the major industrial centre in Syria in terms of manufacturing production especially output it is more important than Damascus. The industrial city of Aleppo called Sheikh Najjar which is outside the city is entirely closed down because of security reasons. We have some 600 plants that have stopped production. That’s going to show in the coming weeks and months in terms of the inflation rate because when you don’t have production, you have less supplies, you have higher prices and so on so forth.

And then, as I was saying, there is a deep cut in government expenses. The government is basically paying the salaries. There is almost no investment expense or whatsoever, but the services of the government are very disrupted. As I was telling you, in Raqqah for instance, you don’t have oil. I was talking to a journalist friend of mine who came back from Aleppo last week and he told me in Aleppo in rebel-held areas, you had electricity sometimes.

The question obviously of the potential collapse of this year in economy or, in other words, will this serious deterioration in the economic social condition and the country lead to a collapse or to more pressure? Now, if you want my first answer, it would be “I don’t know”. You first have to define what collapse is. The guy from Raqqah in this part of the country the economy has, in practice, collapsed. When you have inflation at 36 percent and the currency that has lost 50 percent of its value in 18 month is that collapse or not? A lot of people expected for instance the currency to fall much faster than that, but if you look at the history of Lebanon for instance, in Lebanon it took seven years until 1982 for the currency really to collapse. In Egypt, it is true the revolution took 18 days but you had a lot of instability. I think the currency lost 5 percent of its value. So the currency falling by 50 percent is a big figure in itself.

Two days ago, the deputy that may be give us a clue as to what economy could potentially collapse, the Deputy Prime Minister in charge of Economic Affairs named Qadri Jamil who is theoretically a member of the opposition. No, I mean that’s how he calls himself. Why do you think I was making fun? He said – Qadri Jamil said on Syrian TV, there is no other solution to the crisis that the country is living than a political solution and, if there is no political solution, in three month’s time the Syrian economy will have a stroke, meaning a heart attack. I mean, you know, will collapse. I don’t know what to make of this statement. You have to remember that the Syrian president himself in June 2011 warned people that the economy could potentially collapse. It was, at the time, a bit of a surprising statement. Usually head of states would not give alarming statements, but anyway, he said that. And in practice in Damascus, in the coastal area, in Sweida, in some parts of the extreme north east, the economy has not collapsed, Or at least it is not deteriorating too quickly.

How come it isn’t deteriorating markedly? First of all, I said it’s all very relative when we see how quickly it’s falling or not. But let’s try to find some answers. One of these could be in the fact that the fall in the value of the Syrian pound has basically revalued the foreign exchange holdings of the government. Basically, when you have $10 billion and the SYP is at 50, it’s worth 500 billion. And when the SYP is 70, it’s worth 700 billion Syrian pounds. So basically, this could have [inaudible]. Then you have the fact that the Syrian economy is relatively, by middle-eastern standards, a diversified economy. You are not in the Gulf where the economy is you know overwhelmingly reliant on oil. It’s an economy that has an agriculture sector which now contributes to 16 percent of GDP. You have oil which is at between 8% and 10%. Manufacturing at 5 and 7, real estate at around this level, financial services also, tourism at 5, government services, retail and so on so forth. So this partly has off set. For instance, the agriculture crop of last year of 2011 was a good crop and that certainly played a factor in the fact that prices did not go up. Syrians say very often they are self-sufficient and that is not entirely wrong. They produce many, many things. I just remembered now that there is a figure I wanted to give you that I forgot a bit earlier in my – I will do it now before . . . [responding to chair who says he has two minutes left] Only two? That’s not fair. It’s usually five on the paper. I will put one in front of you.

The agriculture sector in 2003 represented 25 percent of GDP. In 2010, it was worth 16 percent. That’s a huge decline. That’s 9 percent decline in a very short period of time. Okay, now I will try to answer questions on the business community. The question is often raised: when is the business community going to shift sides? The answer is it’s not going to shift sides for many reasons, but one of them is that it’s very difficult in Syria to speak of a single business community. The interests of the business community are very diverse. They are not single collective negotiators. In Homs and Hama, the business community did participate in the demonstration with the people. Sorry, the Chamber of Commerce, the business community of Homs and Hama did participate in strikes in their cities. The Chamber of Commerce and Industry of Deir ez-Zor in July 2011 published a statement condemning the behaviour of the security services and saying long live our martyrs. That was in July 2011. That was the Chamber of Commerce of Deir ez-Zor. So the business community has, in some areas, to some extent, reacted. And in different ways, it’s behaving now. There are a lot of businessmen who are providing support to the civil society. A lot of them, of course, I think they hedge. They don’t really know what’s going to happen so they pay both sides.

I will conclude with two things about the future. I think we have to be careful about two things. We should have in mind this: first of all, the reconstruction of Syria is going to cost billions and billions of dollars. While the opposition group said that in the first six months, $11 billion will be spent in the construction — $11 billion that is 20 percent of GDP. That’s a huge amount. Maybe that’s the correct amount but the people are going to repay that debt are the Syrian people. Any reconstruction programme must be made in a transparent and participatory way. We have to be aware — we don’t want Syria to face what the Lebanese or the Iraqis lived and went through, that’s one thing.

The second thing I want to say is that we have to be aware that what is going on in Syria is a revolution. I’m not saying that because I am with or against the revolution. I am just trying to describe the depth of the changes that are in society in this case — the changes in relations between sons and fathers, the number of people who have blamed their fathers. I mean, where were you these last 30 years? Why didn’t you react? There are new identities and ways of expressing their new identities. Christians, Alawites, Kurds. We talked of this extensively before. The view of the world of Syrians have changed, for instance the way the West is viewed has dramatically changed. Everybody was convinced, you know, the West has great principles. They apply them. This has changed. Sectarianism on the rise and these changes, we have to be aware, are we going to impact the economy, too. The economy of Syria post-revolution is not going to be the same economy that it was before. I don’t know how it will be, but the business actors will not be the same. The relation between the state and society will be different and with the private sector. The relations between the centre and the periphery would be also different. so all these items I think we have to take into account.

It took almost a full year before Aleppo, Syria’s second largest city by population, became an active part of the popular uprising that began engulfing the country in March 2011; but when it did, events very quickly took a violent turn. This summer has seen thousands killed in armed clashes and bombings, more than 200,000 inhabitants are estimated to have fled the city and several districts are being levelled under daily bombardment. ‘Normal life’ is at an almost total standstill throughout the metropolis.

Aleppo is also Syria’s manufacturing hub, and according to the head of the Aleppo Chamber of Industry, Fares Shihabi, by mid-August all the plants located in the industrial area of Sheikh Najjar, a large complex located outside the city’s boundaries, had stopped production because of the rising insecurity. Factories could not be protected and employees feared going to their workplace, while the supply of inputs and the distribution of finished products became almost impossible — that equals more than 600 factories and 40,000 workers in the industrial city that are estimated to be out of work. Should the violence last it is likely that shortages of all kinds of products will occur across the country. Already, medical supplies are threatened and the World Health Organization has warned of drugs shortages — with some 20 companies producing a wide range of medicines, Aleppo is a major center for pharmaceutical production in Syria.

Until the recent rise in violence, Aleppo had managed to escape some of the worst economic consequences of the uprising. Its manufacturers, in particular, benefitted from a number of favorable circumstances. The suspension of the free trade area with Turkey, which was decided after Syria’s northern neighbor imposed sanctions last December, and the increase in customs tariffs decided by the government earlier this year, helped reduce competition in the local market. Likewise, depreciation of the Syrian pound, which has lost some 50 percent of its value compared to the United States dollar in the last year and a half, temporarily spurred increased exports to neighboring Iraq.

Though it has fallen well behind Damascus in terms of overall wealth, Aleppo had long been Syria’s economic capital. Its gradual decline began in the early 1920s when the demarcation of the country’s borders cut its links with its Turkish hinterland, followed by the nationalizations of the late 1950s and early 1960s that stripped the Syrian bourgeoisie, then mainly based in Aleppo, of its land and other assets.

However, it was only in the early 1970s that the balance tipped clearly in favor of Damascus with the increasing centralization of the Syrian state and the growing state capitalism imposed by then President Hafez al-Assad. From then on, the closer investors were to the center of power in Damascus, the luckier they were in winning large government contracts, which represented a large source of revenues and profits for both them and the middlemen/bureaucrats that helped them conclude the deals.

It is therefore no surprise that in the late 1970s, when protests demanding more political freedoms and democratic change began across the country, Aleppo rose — only to see its protest movement and that of neighboring Hama ferociously crushed by the government — while Damascus watched. Only when two decades later Bashar al-Assad reached power and began a policy of economic and trade liberalization, did the city regain some of its lost wealth. The improvement of ties with neighboring Turkey, in particular, helped boost trade, tourism and investment. After decades of marginalization, Aleppo saw its businesses thrive again and sought stability, calm and order. This was not, however, to last, and the city, as most other parts of the country, is now engulfed in an uprising that is unlikely to end anytime soon.

The profound economic, social and political changes likely to emerge from the revolution will force a redefinition of the country’s economic model and the role of the state, of the links between the center and the periphery and of the balance between trade and production. Whether Aleppo will lose again from these changes, as it has with most other dramatic turns of the last century, or whether it will adapt successfully to the situation as it evolves, remains to be seen.

Note: This article appeared first in the September 2012 edition of Executive Magazine